What Happens to the Balance when You Close a Prepaid Card Account

Closing a prepaid card with a balance remaining typically means to user will lose the balance. This is one way prepaid card issuers create terms that favor them instead of the card's users. Balances on a prepaid card are treated differently than balances on other credit cards. As such, it is best to spend the entire balance on a prepaid card before closing the account.

Prepaid Cards are not Credit Cards

Prepaid cards are not credit cards; they do not use any loaned money in order to make purchases. Instead, they are issued in a sum only after the user has deposited that sum into an account with the issuer. The main demographic that uses prepaid cards is not eligible for credit but would like to have a credit card for use in necessary situations. With a standard credit card, it is not possible to close the account if there is a balance. The balance is actually money owed to the card issuer, and the borrower must repay the funds before he or she can walk away.

Leaving a Balance on a Prepaid Card

With a prepaid card, it is actually the issuer that owes the money. The user has placed the funds on hold with the issuer, and the issuer uses those funds to pay the user's bills. Because the issuer is the party owing money when the card is closed, the borrower is not likely to see the money returned. These terms are typically expressed in the contract the issuer signs with the user. The terms may be in small print and not clearly expressed up front. However, just because a user did not see these terms does not mean the user is not held to them. Most prepaid cards have a "use it or lose it" policy. Some may even expire at a given date, and any remaining balance will be forfeited at that point.

Problems with Prepaid Credit Cards

In order to avoid leaving a sum on the card, some users may want to place frequent, smaller sums down to reload instead of one large sum. This can be unfavorable since the issuer will likely charge a fee each time a user reloads a card. If the same fee is charged to load $50 that is charged to loan $500, it makes more sense to load $500 once than $50 ten times. As such, many users are enticed to put large sums onto the card.

Avoiding Unnecessary Expense

To avoid both finance charges and leaving a sum on the card, users should find a way to use a balance completely before closing the account. For example, many will be used to using the card only for luxury purchases. However, it is possible to use the balance to pay a simple electric bill or buy groceries. As the card nears its expiration date, a user should use it before any other form of payment. Once the user qualifies for a credit card, closing the prepaid card account makes sense financially.


Improve Your Credit Score - Free Consultation